Home Depot (NYSE: HD) is one of the best-performing stocks in history, but the home improvement retailer has struggled recently. The company has faced challenges in the housing market like the rest of its peers, and comparable sales and profits have fallen over the last several quarters.
Image source: Home Depot.
However, Home Depot could be ready to kick off a comeback. Let's take a closer look at why.
1. The housing market is due for a recovery
It's not a secret why Home Depot has struggled recently. The housing market has been weak since the pandemic. Mortgage rates soared and current homeowners have experienced the "lock-in" effect, meaning they're reluctant to sell their homes and lose out on their low mortgage rates.
However, the Fed has started lowering interest rates and is expected to continue to do so through the rest of the year and next year. Lower rates should help bring down mortgage rates and encourage a housing recovery. Additionally, lower rates are likely to boost spending on home improvement projects like remodels and renovations, which are major drivers of spending at Home Depot.
Americans have record levels of home equity saved up after years of the lock-in effect and rising home prices, and they'd like to tap into that for home improvement projects. However, falling interest rates are likely to coax increased spending on Home Depot after weak home improvement spending over the last few years. If rates fall far enough, a strong rebound seems likely for Home Depot and its peers.
Finally, existing home sales are down roughly 40% from pre-pandemic levels, showing that there's a lot of upside in the housing market once it starts to normalize.
2. The SRS Distribution acquisition looks set to pay off
Home Depot made a big move earlier this year when it acquired SRS Distribution, a leading building materials distribution company. Building materials distribution has been one of the fastest-growing segments of the home improvement and housing sectors. SRS Distribution will give Home Depot increased exposure to the pro market, where it already has an advantage over rival Lowe's, and will help it take advantage of a potential boom in new home sales.
There's an estimated shortage of millions of homes in the U.S., and both presidential candidates are aiming to encourage new construction to close that gap. A boom in new home construction would drive business to both SRS Distribution and Home Depot, helping to drive the company's rebound.
The SRS acquisition will expand Home Depot's addressable market by roughly $50 billion to reach $1 trillion.
3. Its competitive advantages remain strong
Home Depot's recent performance has been weak for cyclical reasons as the housing market has been down, but the business still enjoys a wide economic moat in its industry.
Home Depot essentially competes in a duopoly in the home improvement retail market with Lowe's. Both companies operate superstores stocked with a wide range of products at competitive prices.
Home Depot has used its profits to invest in e-commerce and technology, streamlining shopping through its app, and it produces strong margins for a retailer with an operating margin of 15% in the most recent quarter.
The home improvement retail sector has high barriers to entry, and there are few threats to Home Depot's dominance of the industry. Amazon has been unable to crack it, and Americans will continue to need products like hardware, appliances, and lumber that are staples at the retail chain.
In other words, Home Depot should get back to delivering solid growth once the housing market normalizes, and that should put the company back on the path to long-term outperformance.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Jeremy Bowman has positions in Amazon. The Motley Fool has positions in and recommends Amazon and Home Depot. The Motley Fool recommends Lowe's Companies. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
